Glossary

1040 - the 1040 is filled by any individual who meets the minimum requirements for filing taxes. The 1040 has been in use since the income tax amendment was passed in 1913. The 1040 consists of two pages which a filer must complete in order to determine his or her tax burden payment or refund amount.

1099 - The 1099 is used for types of income not covered in the W-2. Individuals who work as independent contractors receive 1099 forms because their type of compensation is not considered wages, and thus is treated differently for taxes.

W-2 – The W-2 is without a doubt the most famous IRS form. Employers complete the W-2 for every employee to whom they pay a salary or wage. The W-2 is also used to report FICA and other taxes withheld by employers over the course of the year.

Ad Valorem - Ad Valorem is a type of tax method and is Latin for “according to value,” which, as you may have guessed, means that an ad valorem tax is a tax based on the value of a good. This simply means that for a given tax the amount you are required to pay is simply a predetermined rate times the value of the item being taxed. Here are some examples of Ad Valorem taxes:

Adjusted gross income - Otherwise known as taxable income, AGI is the income figure used for the calculation of income tax payments. It is calculated as gross income – any deductions and exclusions.

Capital Gains Tax - A tax on the gains upon sale of a non-inventory asset, such as stocks, bonds, or property. However, not all distributions from assets are taxed as capital gains. For example, dividends from stocks are taxed at the rate of ordinary income, not at the capital gain rate. This is because capital gains tax is only paid on the gain upon sale of an asset.

Corporate Tax - The corporate tax is just as it sounds: a tax on the profits of corporations. The taxation for specific corporations is largely dependent on their corporate structure (that means that most small businesses are taxed differently than large corporations) but for most large corporations taxes on profits can be as high at 35% and as low as 15%. Taxes for small business are usually taxed as income to owners, effectively bypassing the corporate tax. We’re going to go ahead and guess that McDonald’s is on the higher end of things. Hope that Hamburglar isn’t tempted to cross over into tax fraud.

Environment Affecting Tax (Carbon Tax) – These are taxes which serve two purposes from a government perspective. First: to increase the costs of an action that has adverse side effects for the majority of society, and second: to provide the government with a pool of revenues it can use to mitigate the damages of a particular action on society. A common environment affecting tax in the news today is the carbon tax, which taxes the carbon emissions by corporations. Take that, Mr. Burns.

Excise Tax - An excise is simply a duty levied by the government on specific products or services. Excises can be levied at both the state and federal level. Excises are different from sales taxes in that they are typically imposed based on the quantity of a good or service rather than based on the price. Common goods which have excise taxes are tobacco products, gas, and alcohol. You know – all the bad stuff.

Fee-Simple Holdings - A fee-simple land holding is an estate in land and the way that land is owned in most common law countries. This type of ownership in land is (unfortunately) subject to some government powers such as eminent domain, taxation, regulation, and escheat.

FICA - Under the Federal Insurance Contributions Act, tax commonly known as the FICA tax (though you can call it whatever four-letter word you would like), employers are required to withhold funds from wages and salaries for the purpose of funding Social Security and Medicare. Employees are only required to pay half of their FICA obligation; the other half must be matched by employers (no wonder it is so hard to find a job). The total amount withheld from an employee’s salary for FICA is 6.2% for Social Security (up to the first $102,000) and 1.45% for Medicare. (And that isn’t even income tax!).

If you think a total of 7.65% is bad for FICA taxes then hopefully you never plan on being self-employed. Self-employed individuals must pay BOTH the employee and employer share of FICA taxes, which is 15.3%!

Gift tax - The gift tax is the living cousin of the estate tax. The gift tax is designed to prevent individuals from passing along their wealth during their lifetimes in an effort to avoid any potential estate taxes. In 2009, one individual could only give gifts of $12,500 to another person, anything above that would be taxed at the estate tax rate of 45%. However, giving money is so impersonal. What’s wrong with a nice homemade card?

Inheritance Tax - The inheritance tax is a tax on the transfer of an individual’s estate after death to his or her heirs. This tax only applies to estates over a certain threshold, which in 2009 was 3.5 million dollars. The value of an estate is determine by the value upon death minus funeral costs, charitable gifts, and certain property left to a living spouse the total is considered the taxable estate. The tax rate for estates over 3.5 million is 45%, so all inheritance beyond that figure will be subject to that tax.

IRS – The Internal Revenue Service (IRS) is the federal government agency in charge of tax collection. Personal Property Tax - The most common types of personal property taxes occur on large ticket movable items such as cars and boats. Many state and local governments will impose licensing fees for these items as an additional means to generate revenue. Great. You knew buying those seven boats was going to have negative repercussions

Poll Tax - Commonly known as a head tax, a poll tax is a tax that is levied at a fixed amount per individual. It differs from something like an income tax in which ones tax burden is determined by their relative earnings. The advantages of a poll tax for the government is that it is easy to administer. (Are you a person? Okay, then you pay a tax). There was some limited historical use of the poll tax; however, it never gained broad popularity among officials or tax payers. So you can just log this one away until they decide to bring it back.

Property Tax - Property tax is an Ad Volorem tax based on the assessed value of a property. Ad Volorem simply means that the tax is based on the value of the asset (land, building etc.) being taxed. The assessed value of a property (off of which property tax is determined) is typically 50-75% of the fair market value of a given property. The fair market value of a property is determined by a property assessor and then that number is multiplied by a predetermined percentage to get the assessed value.

Property taxes are typically levied by local governments and are the preferred source of taxation for these government entities. The revenue stream from property taxes is relatively stable and predictable because of the difficulty for individuals to hide real property from tax collectors.

Sales Tax - The sales tax is the tax that all of us are most familiar with and the one which we pay most frequently. Sales tax is simply a consumption tax based on the value of a good. However, many times necessity items such as food are exempt from sales tax. A sales tax requires merchants who sell goods to serve as tax collectors for the government.

Stimulus Check – A stimulus check is a payment sent out by the government to specific tax payers for the purpose of supporting the economy. They won’t be happy with you if they find out you just stuffed it under your mattress.

Tariffs - A tariff is a tax that is imposed on an imported or exported good. In previous centuries, the tariffs made up a much greater percentage of US government revenues than they do today. Our government still uses tariffs, but primarily for purposes other than revenue generation. Tariffs can also be used to protect domestic industries by making imported goods increasingly expensive relative to those produced domestically.

Tax Base – The value that is subject to a tax. For example, the value of a purchased item is the tax base for a sales tax.

Tax Credit - Tax credits are simply reductions in income tax liability and are treated like tax payment reductions. Tax credits are deducted straight from income tax liability, so they are much more valuable than deductions which only lower taxable income. Tax credits are given for being blind, losses due to disaster, caring for a child, and much more.

Tax Evasion – Tax evasion is the act of avoiding paying one’s taxes. As you might imagine, it is “frowned upon.”

Tax Refund – A refund is the amount of money returned to a tax payer who overpaid on his or her return.

Tribute Systems – Historically, tributes were payments made by one party to another as a sign of respect or allegiance. Oftentimes these tributes were paid by smaller cities or regions because of threats of conquest by larger, more powerful neighbors – because there is nothing like forced respect.

Tributes were also paid by individuals - typically peasants and vassals. Vassals would pay tributes to government officials for the privilege of engaging in very prosperous trade; those who did not pay the tribute were unable to participate in it. Peasants would also pay tributes to their lords in exchange for protection, their tributes going toward the costs of raising armies.

Value Added Tax - A value added tax is a tax which is levied on goods at each step in the production process based on the amount of value added to that item during that particular step. In other words, instead of simply levying a sales tax at the point of sale, taxes are levied upon every business from production to consumption.

This original motive for the implementation of a value added tax was that high sales taxes were leading many individuals to smuggle in goods to circumvent the tax. By taxing at every stage of production, governments were able to collect all the tax they would have otherwise been collecting with the sales tax without the smuggling.